And even though REIT share prices were cheap at the time, it still took a few years
for [them to recover].

What happens now? Transparency has turned treacherous for real estate in the public markets. The stall in activity, now more than a month old, will continue to significantly slow new lending for construction, renovation, and development. (The FTSE NAREIT All REIT index rallied 3.4% Tuesday, outpacing the overall market, but it is still down about 10% for the year—Editor.)

REITs, for their part, despite how incredibly well they have performed for the past seven years relative to other stocks, have typically been no match for the voracious private-equity buyers in either competing for choice properties or in maintaining their corporate integrity. Private equity players have arbitraged the strange disconnect between valuations of property and performance as measured by Wall Street, which has remained deeply skeptical of real estate equity shares.

Actually, it has become clear that the tens of billions [of dollars] in REIT buyouts over the past three years have been spent almost exclusively to buy up companies whose managements were unable to maximize the increasing values of their portfolios. With the exceptions of multifamily REIT Archstone-Smith, industrial company CenterPoint and, at its conclusion, office REIT Trizec, companies that did get bought deserved to disappear.

And no matter how much share prices rose for equity REITs—and rise they certainly did, just as they are certainly falling now—they just could not satisfy analysts and investors and keep private equity predators at bay. Now, with those multiples contracting, are they more vulnerable? Yes and no.

First, we will see some announced deals— Archstone, Hilton, and Republic—carried through to completion. But at least for now it is unlikely that the private equity buyers, who rely heavily on the leverage they are currently frozen out of, make any new overtures. For one thing, the bloom is off the rose, even of trophy office buildings, as it becomes clear that too-high leverage just doesn't make for good operating sense if net operating income doesn't match debt service.

But more importantly, many market observers are [ignoring] the very real danger posed by the collapse of the national housing market and the impact that is already having on Wall Street. While we haven't yet seen layoffs there, I believe we soon will.

Financial service firms that have growth and expansion plans will certainly curtail those—we hope. And it won't be long before we see a pull back in business travel that will affect the raging hospitality industry.

Retail? Consumer spending growth has been fueled by the home-as-ATM trend, and with those machines now acting up and demanding their money back, it's difficult to see where the cash will come from.